Longbow Downgrades Herman Miller On Higher Spending, 'Difficult Comps'

In a report published Tuesday, Longbow Research analyst Joshua Borstein downgraded the rating on

from Buy to Neutral, while stating that increased spending, FX headwinds and difficult comps had been offsetting the company's recovery story. The analyst believes that there are a number of factors that are likely to dampen earnings in the coming three to four quarters. In such a situation, the share price is likely to be range bound in the low $30s range for several quarters. According to the Longbow Research report, "SG&A expenses will increase by an incremental ~$15M on several growth initiatives, including expanding the DWR footprint and opening a flagship Herman Miller store in NYC to showcase the company's commercial and consumer facing businesses. Those initiatives will undoubtedly bolster top-line growth medium to long term but will dampen contribution margins in the short-term." In addition, the analyst expects Herman Miller's revenues to be adversely impacted by a big energy project during FY15, although this is not expected to be repeated. Although the company is expected to attempt to cover the revenue shortfall, the absence of the large project is likely to pressurize top-line growth during 2H16. FX headwinds are also likely to be higher than expected, leading to a hit of $25-30 million to the revenue growth and $0.10-$0.12 to the earnings in 1H16. "We will look to become more constructive again once increased investments abate and actions to remedy recent missteps begin to take effect," Borstein added. The EPS estimates for FY16 and FY17 have been lowered from $2.07 to $1.95 and from $2.30 to $2.20, respectively.